Now the time for CDs?

[twins0203]

I've got a large amount of cash sitting in a MMA right now. I am thinking about doing a 5YR CD Ladder with it, as I will not be needing to touch the money.

I've read that most are expecting the FED to lower the rate at their Sept meeting.

Is now probably the best time to do it?

I think it's kinda risky to buy into such a long-term CD at rates that are still historically on the low side.

One possibility is the Fed lowers rates at the next meeting, but then inflation makes a comeback (which is a possibility with the ever-increasing money supply situation) and the Fed raises rates like crazy over the next 5 years, leaving your CDs in the dust.

Another issue is what if an emergency happens and you need that money before the 5 years is up? A CD ladder may alleviate this problem.

Having said all this, banks nowadays seem to let you break CDs without much pain, so it may not be as big of a risk "locking in" anymore. I guess it depends on the specific terms of the CD.

[Ima saver]

I would stick with one year CD's.

[twins0203]

Thanks for the replies, points taken

Is there a link available for the interest rates in the past? See, when I started watching the MMA & CD rates, was back when they were 3.xx%, so to me the 5.3% APY CDs seem nice, especially since they are predicting a rate cut next month. I guess I wasn't thinking on how much inflation could in fact force them to raise the rates even higher in the future, < 5YR.

Here's the run down on my situation. I have saved up $230k which is sitting in a 2 MMAs now, PODs added so FDIC coverage is there. I thought about doing a ladder, 5, each CD with 40k. That would leave me w/ 30k+ for any emergency that could arise. But I'm living w/ my parents now (22 years old) so no big expenses.

I know I really should put more in Mutual Funds, but to be honest the last few weeks have made me disheartened with them, or at least while this whole housing fiasco is going on.

Maybe I should just do one jumbo CD for 1YR and see how the interest rates are effected in that time.

Any other thoughts or opinions?

Thank you!

[poundwise]

CDs, especially at 5.3% APY, are not appealing when there are several online banks offering that rate or better on simple online savings accounts.

If you do want a CD, check out AmTrust Direct for 5.41% APY or IndyMac Bank for 5.5% APY but, really, I would not be looking to dive into a CD or series of CDs anytime soon.

[kv968]

CDs, especially at 5.3% APY, are not appealing when there are several online banks offering that rate or better on simple online savings accounts.

If you do want a CD, check out AmTrust Direct for 5.41% APY or IndyMac Bank for 5.5% APY but, really, I would not be looking to dive into a CD or series of CDs anytime soon.

You can get 5+% with online savings accounts now but it might also be good to to lock in some money with a 1 yr cd at 5.3+%. AmTrustDirect just cut their 1 year cd rate by 10 basis points to 5.31% APY.

[scfr]

I say yes it's time, but not necessarily for 5 years. I went ahead and got two 6-month CD's on Aug. 10th. The Fed pushed me off the Fence: Scfr's Personal Finance Blog Both of them were at virtually the same rate I'm getting on MMA's, but I wanted to lock in.

I'm glad I went ahead when I did. Yields on short-term Treasuries at Monday's auction were way, way down (lowest in 2 years) ... will anyone be surprised if bank savings rates following suit?

I would have gone for 1-year CD's but my DH may need that money for his business before a year is up.

[twins0203]

My main reasoning for CDs would be to lock the rate in incase they do lower the rate because it would be very shortly that banks would follow suit and begin lowering MMA APYs.

Honestly, I think you should be more aggressive at 22 years old....

But if you are really risk-averse, I think the 1-year CD is a better choice than the 5-year CD.

If you truly believe that rates are going to fall in the short-term, you can look at short-term bond fund. You would get equivalent interest, but also a small boost in capital gains.

[Vapors]

CD rates already show what the market thinks is going to happen. The fact that everyone thinks the Fed is going to cut the rate has caused CD rates to fall the last month or so. Now, you need to think about what's going to happen after that cut. The Fed will release a statement after their meeting that hints to what they think is going to happen in the future. The market reacts again to that statement.

So, even though the Fed will probably cut the rate, rates might not drop any more than they already have. And if they leave the rate alone (or hint that they think inflation will come back), you might see rates rise.

It's all a guessing game. That's what makes a CD ladder so important, as you seem to already know. Here is a link to a list of historical CD rates for 6 month CDs. As you can see, the rates are about the best they have been since 1990. So if you want to buy CDs, buy CDs. Ladder them like you want so that as rates go up or down, you average out right there with them. So buy 1, 2, 3, 4 and 5 year CDs. When the 1 year comes up, buy a 5 year with it. Eventually, you will have all 5 year CDs with one renewing every year.

http://www.federalreserve.gov/releases/H15/data/Annual/H15_CD_M6.txt

edit: spelling mistake

[twins0203]

Thanks very much for the info!

I do agree that I should get more aggressive. I guess my problem is that I check the S&P daily and see the results. I have a small account at Vanguard in the Index 500, so I guess seeing the drops and such gives me a sense that it isn't doing well, when in reality I need to look at the longer term picture.